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    XVCV

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    This document contains information to calculate the expected earnings per share (EPS) for a company under different capital structure scenarios (debt ratios of 0%, 15%, 30%, 45%, and 60%). It provides the sales amounts, costs, earnings before interest and taxes (EBIT), number of shares, and interest costs for each scenario. Using this information, it calculates the EPS for each sales probability and debt ratio, weighted averages these EPS amounts to determine the expected EPS, finding the highest expected EPS of $5.18 occurs at a debt ratio of 60%.

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    XVCV

    Uploaded by

    JP
    320 views3 pages
    This document contains information to calculate the expected earnings per share (EPS) for a company under different capital structure scenarios (debt ratios of 0%, 15%, 30%, 45%, and 60%). It provides the sales amounts, costs, earnings before interest and taxes (EBIT), number of shares, and interest costs for each scenario. Using this information, it calculates the EPS for each sales probability and debt ratio, weighted averages these EPS amounts to determine the expected EPS, finding the highest expected EPS of $5.18 occurs at a debt ratio of 60%.

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    This document contains information to calculate the expected earnings per share (EPS) for a company under different capital structure scenarios (debt ratios of 0%, 15%, 30%, 45%, and 60%). It provides the sales amounts, costs, earnings before interest and taxes (EBIT), number of shares, and interest costs for each scenario. Using this information, it calculates the EPS for each sales probability and debt ratio, weighted averages these EPS amounts to determine the expected EPS, finding the highest expected EPS of $5.18 occurs at a debt ratio of 60%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    320 views3 pages

    XVCV

    Uploaded by

    JP
    This document contains information to calculate the expected earnings per share (EPS) for a company under different capital structure scenarios (debt ratios of 0%, 15%, 30%, 45%, and 60%). It provides the sales amounts, costs, earnings before interest and taxes (EBIT), number of shares, and interest costs for each scenario. Using this information, it calculates the EPS for each sales probability and debt ratio, weighted averages these EPS amounts to determine the expected EPS, finding the highest expected EPS of $5.18 occurs at a debt ratio of 60%.

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    © All Rights Reserved
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    of 3

    P13-

    27

    (a) Probability
    0.30 0.40 0.30
    $ $ $
    Sales 600,000 900,000 1,200,000
    Less: Variable costs (40%) ( 240,000 ) ( 360,000 ) ( 480,000 )
    Fixed costs ( 300,000 ) ( 300,000 ) ( 300,000 )
    $ $ $
    EBIT 60,000 240,000 420,000

    (b) Capital Strucuture Debt Book Value of Number of Shar


    Amount of Debt Amount of Equity
    Ratio Shares Common Sto
    $ $ $ $
    0% - 1,000,000 25 40,000

    15% 150,000 850,000 25 34,000

    30% 300,000 700,000 25 28,000

    45% 450,000 550,000 25 22,000

    60% 600,000 400,000 25 16,000

    (c) Capital Strucuture Debt Before Tax Cost of


    Amount of Debt Annual Interest
    Ratio Debt
    $ $
    0% - 0.0% -

    15% 150,000 8.0% 12,000

    30% 300,000 10.0% 30,000

    45% 450,000 13.0% 58,500

    60% 600,000 17.0% 102,000

    (d) EPS = [(EBIT - interest) x (1 - T)] / number of common shares outstanding


    EPS
    0%
    $
    [( $ 60,000 - 0) x (1 - 0.40) / 40,000 shs] [( $ 60,000 x 0.60) / 40,000 shs] 0.90

    [( $ 240,000 - 0) x (1 - 0.40) / 40,000 shs] [( $ 240,000 x 0.60) / 40,000 shs] 3.60


    [( $ 420,000 - 0) x (1 - 0.40) / 40,000 shs] [( $ 420,000 x 0.60) / 40,000 shs] 6.30
    15%
    $
    [( $ 60,000 - 12,000) x (1 - 0.40) / 34,000 shs] [( $ 48,000 x 0.60) / 34,000 shs] 0.85

    [( $ 240,000 - 12,000) x (1 - 0.40) / 34,000 shs] [( $ 228,000 x 0.60) / 34,000 shs] 4.02

    [( $ 420,000 - 12,000) x (1 - 0.40) / 34,000 shs] [( $ 408,000 x 0.60) / 34,000 shs] 7.20
    30%
    $
    [( $ 60,000 - 30,000) x (1 - 0.40) / 28,000 shs] [( $ 30,000 x 0.60) / 28,000 shs] 0.64

    [( $ 240,000 - 30,000) x (1 - 0.40) / 28,000 shs] [( $ 210,000 x 0.60) / 28,000 shs] 4.50

    [( $ 420,000 - 30,000) x (1 - 0.40) / 28,000 shs] [( $ 390,000 x 0.60) / 28,000 shs] 8.36
    45%
    $
    [( $ 60,000 - 58,500) x (1 - 0.40) / 22,000 shs] [( $ 1,500 x 0.60) / 22,000 shs] 0.04

    [( $ 240,000 - 58,500) x (1 - 0.40) / 22,000 shs] [( $ 181,500 x 0.60) / 22,000 shs] 4.95

    [( $ 420,000 - 58,500) x (1 - 0.40) / 22,000 shs] [( $ 361,500 x 0.60) / 22,000 shs] 9.86
    60%
    $
    [( $ 60,000 - 102,000) x (1 - 0.40) / 16,000 shs] [( -42,000 x 0.60) / 16,000 shs] -1.58

    [( $ 240,000 - 102,000) x (1 - 0.40) / 16,000 shs] [( 138,000 x 0.60) / 16,000 shs] 5.18

    [( $ 420,000 - 102,000) x (1 - 0.40) / 16,000 shs] [( 318,000 x 0.60) / 16,000 shs] 11.93

    (e) n
    Expexted EPS=∑ EPS j x PR j
    i −1

    Expected EP
    0%
    $
    (0.30 x 0.90 ) + ( 0.40 x 3.60 ) + ( 0.30 x 6.30 ) 0.27 + 1.44 + 1.89 3.60
    15%
    $
    (0.30 x 0.85 ) + ( 0.40 x 4.02 ) + ( 0.30 x 7.20 ) 0.26 + 1.61 + 2.16 4.03
    30%
    $
    (0.30 x 0.64 ) + ( 0.40 x 4.50 ) + ( 0.30 x 8.36 ) 0.19 + 1.8 + 2.51 4.50
    45%
    (0.30 x 0.04 ) + ( 0.40 x 4.95 ) + ( 0.30 x 9.86 ) 0.01 + 1.98 + 2.96 $
    4.95
    60%
    $
    (0.30 x -1.58 ) + ( 0.40 x 5.18 ) + ( 0.30 x 11.93 ) ( - 0.47 ) + 2.07 + 3.58 5.18

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